The problem of public sector pay: A study of alternative pay setting schemes for the public sector using simulation

This dissertation addresses the question: How should governments set pay for civil servants? The problem is traced from the seventeenth century reign of Charles I in England to the demise of comparability in the United States and Great Britain in the early 1980s. The dissertation argues that comparability, with some refinements, offers a better approach to civil service pay setting than the likely alternatives. This conclusion follows from a study of the history of government pay setting efforts; review of the theoretical literature on pay setting; and, evaluation of the primary methods of pay setting for civil servants using a simulation model.; Comparability is a pay setting process where salaries for civil servants are set equal to the average pay of private sector workers engaged in comparable work. This process provides a verifiable standard that is sufficient for recruitment and retention of needed workers, is cheaper to implement than incentive pay and enables the public to determine if overpayment has occurred. It does not stimulate maximum effort.; The problem of public sector pay is investigated using a simulation model. Simulation provides a methodology for comparing the primary pay setting schemes under a variety of settings. Four different pay setting schemes are tested using simulation: pure time rates; pure piece rates; time rates with a linear bonus; and long-term implicit contracts. The simulation is also used to investigate the problem of pay scheme adjustment over time.; Given the high design and monitoring costs associated with incentives, and a high degree of worker risk aversion, the simulation model predicts that a comparability scheme, adjusted for the income security of government employment and expected wage changes in the labor market, offers the best approach to civil service pay setting. This policy is also consistent with the lessons of the history of public sector pay setting and with received economic theory.